Schachne: Alan Greenspan said that
there’s a 0% of the U.S. default on gov-
ernment debt because the U.S. can
always print money. If the U.S. tries to
inflate away its debt, would S&P see
that as default by another name?

Beers: That’s a great question. I think it
comes up a lot and reflects a somewhat
oversimplified view of credit risk. Let
me illustrate that in a couple of ways. A
couple years ago, Zimbabwe, which we
don’t rate, had one of the world
records, probably the fourth-highest
hyper-inflation in history. As far as we
can understand, they did default on
some of their foreign currency obliga-
tions over the years.

But the idea that very high rates of
inflation can somehow reduce the
burden of government debt that is asso-
ciated with high creditworthiness is
something that no reasonable person in
the world would—and S&P’s method-
ology just can’t—comprehend. Then
there’s also a practical point. The U.S.
government, like a lot of governments
in the world, issues inflation-projected
or inflation-linked debt.

So the U.S. government today on a
significant and possibly growing propor-
tion of its own obligations—alongside a
large number of other governments that
we rate around the world—not only is
promising on its nominal debt to pay
interest and principle on time and in
full, but also with inflation-projected
debt its making an extra promise, which
is to protect the value of that debt
against changes in prices.

So for those governments that have a
significant and growing portion of infla-
tion-linked debt, they’ve already given
up the inflation weapon. If they wanted
to reduce the real value of that debt,
they’d have to default on inflation-
linked bonds.

By the way, there are historical exam-
ples of this. Brazil—investment-grade
sovereign that it is today—is just one
example of historically going back to
the 1980s and the 1990s that actually

reneged in part on inflation-linked debt
at that time. They did so by reducing,
retrospectively, the real coupon on that
inflation-linked debt.

So, printing money doesn’t deliver a
‘AAA’ rating. And there’s another more
subtle point to make about high and
volatile rates of inflation, which is the
insidious effect that high and volatile
rates of inflation have on your social and
political institutions, and also on your
economic performance, which of course,
feeds back into your fiscal performance.

And that’s why we’ve also seen exam-
ples historically of sovereigns restruc-
turing their local currency debt (which
they issue with their own currency) with
their own central bank because after all
of the insidious effects of inflation they
try a variety of conventional and uncon-
ventional ways to get out of it.

But one of the unconventional ways
to get out of this treadmill of high infla-
tion is to restructure your debt. So even
with the printing press of a central
bank, it doesn’t necessarily save you
from debt restructuring. That’s the
record of history.

Chambers: I would just add as a foot-
note that the U.S. government, under
existing criteria at least, defaulted on its
debt in 1933 when Roosevelt abrogated
the gold clauses on U.S. debt.

Schachne: Well David Beers, John
Chambers, thank you very much for pro-
viding more insight and transparency into
the downgrade announcement on the U.S.
rating. As David mentioned earlier, we
will be publishing further details on the
ripple effect and how it might affect spe-
cific securities, which will be posted on
www.standardandpoors.com. CW